The online magazine of the Swiss Bankers Association
June 30, 2016


AEOI – Is it Only a Paper Moon?

AEOI – Is it Only a Paper Moon?

Over 100 countries, which is more than half of the nations on our planet, have signed up to the automatic exchange of financial account information. They have therefore committed to start exchanging information cross-border in 2016. There are, however, a number of key elements still missing in order to do so. So are we in actual fact just looking at a paper moon?

You may remember some of the lyrics from a famous old pop song: “It’s only a paper moon… sailing over a cardboard sea... it’s only a canvas sky, hanging over a muslin tree…” In a nutshell, the Automatic Exchange of Information (AEOI) requires banks and other financial institutions to periodically report personal data and financial account information relating to their foreign clients to their local tax authorities. In turn, these authorities automatically exchange the information with other countries. States that will apply the standard from 2016 onwards are called early adopters. The countries that will follow the ordinary timeline will start implementation in 2017. The banks and governments of early adopter states are working very hard to meet the early deadline. But if one takes a closer look at recent developments, the big question seems to actually be whether the AEOI is truly a reality or if, at this stage, it is just a play.

Is the AEOI truly a reality or just a Play?

According to government officials, the AEOI is a major international achievement for G20 and OECD member states. They say the AEOI is essential for building robust international tax standards for the interconnected global economy of the 21st century.

The banking sector, however, is spreading different messages. The European Banking Federation (EBF), which represents banks in roughly 30 of the early adopter countries, stated in a letter to G20 and OECD governments in December last year that banks will not actually be ready to implement the AEOI in accordance with the early adopter’s timeline. They wrote: “We have now reached the date of entry into force of the AEOI in early adopter jurisdictions. We deplore that a vast majority of these jurisdictions have not undertaken the necessary steps to ensure that financial institutions are able to report in 2017 the relevant data in respect of 2016.” Even though the legal framesets may have evolved over the past six months, doubts remain whether the situation for the banks has improved. What are the banks that the EBF statement refers to still lacking?

European Banks will not be ready to implement the AEOI in accordance with the timeline.

The timing, still a paper moon?

Banks in early adopter countries state that they cannot proceed with implementation because the necessary legislation and guidance from governments is not yet available. In principle, banks were to start collecting client information on January 1, 2016. Without the proper legal basis, however, they are most probably abstaining from collecting data for the moment. Otherwise, they could get into trouble with data protection laws or encounter other legal hurdles.

The necessary legislation and guidance is not yet available.

The legal framework, still a cardboard sea?

Of the 55 early adopter states, around 45 have to date adopted so-called primary legislation. In addition, around half of the early adopters have introduced so-called secondary legislation, or detailed guidelines. However, level of the AEOI countries, answers to a number of legal and technical questions remain pending. This means that financial institutions in early adopter states do not know how to proceed correctly. The OECD as the body where the new global standard was elaborated remains optimistic with regard to the timely start of the AEOI, even though transparency about the implementation status in participating countries is weak. Since the actual start of the exchange is still 15 months ahead, there is still ample time to set up all necessary rules, the OECD suggests.

Information on beneficial ownership, still a canvas sky?

A core element of the AEOI is the personal details of bank clients. They will have to be compiled by the reporting financial institutions based on the Financial Action Task Force’s (FATF) most recent client due diligence standards for anti-money laundering. The FATF published these standards in 2012. However, they are not yet in force in many countries. EU member states, for example, will only have to adopt them in June 2017. How can banks collect client data properly in 2016 if the legal frameworks are not in place?

Is this the end of the song?

Hopefully not. Banks and other financial institutions are spending billions of dollars and endless hours on implementing the new framework. For their part, governments should therefore accelerate their efforts on establishing the appropriate legal framework. The OECD should also perform its role by insisting all the countries in question adhere to the same rules. Likewise, the Global Forum should take its reviewing role very seriously and sanction all delays in putting in practice what was agreed upon. Otherwise, a level playing field for financial institutions will remain only a paper field.